Would you accept ‘cash under the table’ for your home?

A Staten Island home buyer put a bid on a Huguenot home listed for $1.3 million a few years ago. After the seller accepted an offer for $970,000, he approached the buyer in private and asked for some “cash under the table.”

“The seller said if I gave him $30,000 in cash, he’d lower the purchase price by $20,000. I thought about it, and saving $20,000 was worth it to me. …So after the closing we went outside and I handed him the cash,” said the buyer, who requested anonymity.

This scenario is one many Staten Island home sellers and buyers are faced with. However, it’s illegal. While Many Staten Island Realtors say this type of situation was more prevalent in the 1980s and 1990s, it’s still happening today.

In some cases, sellers are willing to take part of the home sale in cash to avoid paying high capital gains taxes.

“When you own a two-family house, part of the house is considered a business where you get rental income. When you sell the house, you have to pay taxes on the portion of your house that was considered a business,” said a retired real estate broker who requested anonymity.

“The benefit to the seller is to avoid paying capital gains taxes,” she added. “This happened a lot in the past on Staten Island.”

SELLERS AVOIDING TRANSFER TAX

Cash under the table is often attractive to buyers who have difficulty obtaining a mortgage, and it’s especially prevalent among buyers who own “cash businesses,” said a Realtor who also requested anonymity.

“In the last five years I have had two situations where buyers have wanted to pay (for a home) with cash that they didn’t have in the bank. When they don’t have it in the bank, they can’t show it because they get questioned by the IRS on all the cash they have,” said the Realtor.

“So at that point, they ask the seller if they want to do a (partial) cash deal. …The problem is the lawyers are not going for it any more. Years ago, it was extremely common,” said the Realtor.

In some cases, sellers will take cash under the table and “hold the mortgage” in their name, she said.

“When the seller holds the mortgage, the transfer tax is avoided. In most cases, it’s not a whole lot of money. The transfer tax is 1.25 percent of the sale price of the home. It’s usually only about $5,000. But when the sellers hear ‘cash’ they say, ‘Oh that’s great’,” she said.

While this transaction seems like a scam to avoid paying transfer taxes, there is a legal protocol for which many cash buyers can pursue: Private mortgages.

“There is nothing prohibiting a private individual from giving another person a mortgage for a property. It’s a private money lender,” said Anthony Gatto, general counsel for the New York State Association of Realtors (NYSAR).

“You see this a lot upstate where it will say (in real estate listings), ‘seller financing available.’ If a buyer wants to purchase a property and the seller is willing to hold the note on it, there is no problem with it. They’re a lender like anyone else,” he added.

However, the way to make this process legal is to file a “paper mortgage” with the country clerk, said Gatto.

“Instead of the mortgage being filed with JP Morgan Bank, it’s filed with John Smith,” he said.

TAX FRAUD

But when cash is accepted as a portion of a home sale that isn’t reported to the government, it’s considered tax fraud.

“If they are attempting to circumvent paying any kind of fees, taxes, or things like that and they are perpetrating an official document and not putting down the proper information about the purchase price — like they are saying it’s a $400,000 sale when it’s really $500,000, it’s fraud,” said Gatto.

The Realtor interviewed said, in many cases, “Realtors get stuck in the middle” of these illegal cash deals.

She said her office had a recent situation where the buyers wanted to pay $50,000 cash toward the purchase of a home.

“We were going to have to hold the cash for the seller until after the closing because the lawyers wouldn’t allow it. But then we were able to do a loan where the seller held the mortgage,” the Realtor said.

If a Realtor is involved in a fraudulent home sale where cash is accepted under the table, he or she could face a civil case and could be “disciplined” by the Department of State, the licensing entity for real estate professionals, said Gatto.

Realtors are also held to higher standards than licensed real estate professionals.

“The New York Department of State Division of Licensing Services is the licensing agency for anyone who sells real estate. Individuals who become Realtors take the additional step of joining their local, state and national association. At that point they subscribe to a higher code of ethics,” said Sal Prividera, director of communications for NYSAR.